E-commerce: For some businesses, the only way to go

Like many other people, Paul Buethe of St. Paul has started an
electronic business. Unlike other electronic business owners, he
does not have a computer. Total cost to start his business? Under
$500.

According to Forrester Research Inc., U.S. on-line retail sales
grew from $2.4 billion in 1997 to $7.8 billion in 1998. Start-up
businesses have captured a share of these sales because electronic
business technology has reduced the technical barriers to new entrants.
Following are two examples of retail businesses that have benefited
from lower barriers to entry due to the emergence of the Internet.

Miniature model kit industry

An example of lower barriers to entry is a relatively new entrant
into the niche market of the detailed scale model kit industry-Roll
Models Inc.

John and Mary Roll of Golden Valley, Minn., started Roll Models
in September 1996. John, who works full time as a computer programmer,
and Mary, who quit her CPA job to stay at home with their child,
decided to start a home business. John's long-time hobby was building
miniature models, and they decided that this was a natural business
opportunity.

John attended trade shows to learn about the scale model kit industry,
and discovered that there are hundreds of manufacturers that sell
to numerous wholesalers, who then sell directly to retailers or
by catalog to the model kit enthusiast. John knew that manufacturing
miniature models would be capital-intensive and risky, and that
the traditional retailing option of opening a brick and mortar store
was also expensive. Traditional wholesalers need warehouse space,
catalogs and a sales force.

To break into the industry, then, the Rolls decided to use an
electronic business strategy to distribute merchandise and compete
with the traditional wholesalers and retailers. By using about 500
square feet of their house, their home computer, $10,000 for inventory,
$1,300 for credit card hook-up, $1,000 for various other expenses,
and about 200 hours of computer set-up and dealing with manufacturers,
Roll Models was in business. To attract customers, Roll Models advertised
in trade magazines and on Web sites.

Roll Models has over 18,000 products listed on their Web site
and sells the products at about 25 percent below traditional retailers
and catalog companies. A customer can order from a form on the Web
site, call a nontoll free number, fax or use snail mail. After receiving
an order, Roll Models will fill the order from inventory or order
from the manufacturer or wholesaler and have the model shipped to
the Rolls' home. The various items of a customer's order are then
consolidated and sent to the customer's home whether in Billings,
Mont., or Bintulu, Malaysia. Roll Models currently has over $400,000
in annual sales, four employees and more competition. Before the
business began, there were very few Internet sites that dealt with
miniature model kits, but now hundreds of Web sites sell some form
of these products.

A business for under $500?

Another example of lower barriers to entry is in the comic industry.
Paul Buethe, creator of Slow Jacket Cartoon Syndicate, has been
drawing comics almost all his life. Buethe is a traditional cartoonist
who uses a drafting board and paper to create his offbeat comics
under the "Next" and "Exiles" titles. Buethe, who over the past
five years has tried to break into the comic industry, has finally
succeeded.

The traditional comic industry's value chain contains the artist
visionary creator, the "syndicates" and other wholesalers who consolidate
the artist's content, the newspapers, magazines and other retailers,
and the person who buys and enjoys the creator's vision. Wholesalers
receive hundreds of applications from artists but only contract
with a few. These few lucky artists might receive up to 50 percent
of the revenue that the newspapers, magazines and other retailers
pay the wholesalers.

Buethe entered the comic industry after a friend, who was interested
in learning about building Web pages, built a basic Web page for
Slow Jacket. For a few hundred dollars in fees to obtain copyrights,
a Post Office box, a phone service, a Web site address and an Internet
service provider, Slow Jacket was in business. Slow Jacket's electronic
business strategy is to create an entertaining site that would sell
various cartoonist creations. Buethe started to promote the Web
site through savvy use of search engine technology and guerilla
advertising techniques.

Slow Jacket's plans to advertise its Web site in a national tabloid
classified section. "You can reach over 15 million people for under
$200," Buethe says. He figures he needs a 0.0004 percent purchase
rate to break even. In addition, Slow Jacket wants to add other
cartoonists' work. Other cartoonists would promote and sell their
creations on Slow Jacket's Web site.

Industries that support electronic business

As described above, several industries support electronic business,
and these industries could benefit from the increased use of electronic
business in the future. The industries that support electronic business
include:

the application development industry: contract programmer companies
and people who design and create Web-based applications.

Conclusion

Numerous new businesses have embraced electronic business strategies
to expand sales and reduce costs. Electronic businesses have lower
start-up costs than their traditional counterparts because many
costs are almost entirely avoided. The result of these reduced barriers
to entry is increased competition and lower prices for consumers.
In addition, the digital network, transportation, Internet software
application developers and transaction industries will continue
to benefit from the increased use of electronic business.